Perth's Economy: Rolling with the Punches, Or Not Taking Any Punches? / by Adam Howard

 

Before I start this Update, I need to admit something…

I was wrong in my most recent Update regarding what I was calling a Nudge.  Making things more expensive or cheaper by applying taxes, or providing subsidies, is NOT a nudge.

That type of action is just basic supply and demand.  You move demand for an item up or down the demand curve by making it more or less expensive.

Nudges are tools that don’t involve price, but whose impacts have economic effects, the most famous of which is the inclusion by designers of the image of a fly in the bottom of men’s toilet urinals at Amsterdam’s Schiphol Airport.

Men are simple creatures and like a target when doing a pee, and the inclusion of the fly was meant to provide that target, with the goal to reduce cleaning costs at the airport.  And it worked!!

Estimates are that spillage decreased by as much as 80% and the overall cleaning costs at the airport were reduced by about 10%.

So, there you go.  THAT’S a nudge.

Thanks to my friend and now advisor, whom I will refer to as The Professor, for putting me straight.

Now, onto this Update, and I WILL return to some good ol’ fashioned economic analysis this time.  Enough of the ethics, behaviour analysis and all that guff.  Back to the dismal science.

A friend, whom I will refer to as The Philosopher, put me onto a report put out by The Committee for Perth (CfP) titled Perth as a Resilient Economy.  Here is a link to the full report:

Perth As A Resilient Economy

Now, yes, the CfP is a shamelessly biased body established to promote Perth but also to investigate ways that Greater Perth can be improved.

Their work is done in conjunction with the University of Western Australia (UWA) and appears to have a good base in empirical data.

For those who don’t have the appropriate levels of give a damn to read the report, here are the cheat notes:

-          Greater Perth’s population was 247,000 in 1947, 750,000 in 1971 and 1.9 million in 2015.               Growth over that period of 769%;

-          Western Australia’s population was 500,000 in 1947 (6.5% of national total) , 1,000,000              in 1971 (7.7% of the national total) and then 2.59 million in 2015 (10.9% of the national                  total).  Growth over that period of 518%;

-          Australia’s population was 7.59 million in 1947, 12.94 million in 1971 and 23.79 million in               2015.  Growth over that period of 313%;

-          Western Australia’s Gross State Product (GSP) increased every year for the years                       between 1991 and 2015, and in 20 of those 26 years it outperformed Australia as a                       whole;

-          In 2015 WA had a $150 Billion economy, equivalent to 9.3% of the National economy of             $1.6 Trillion;

-          In 2015 the WA State Economy comprised the following sectors by proportion from                   largest to smallest:

Construction:                                                                                15%

Health Care and Social Assistance:                                             7.5%

Professional, Scientific and Technical Services:                         7.4%

Manufacturing:                                                                            7%

Financial and Insurance Services:                                              6.7%

Transport, Postal and Warehousing:                                          6.6%

 Mining:                                                                                       5.3%

A quick summary of the above numbers shows the following:

-          Greater Perth is a popular destination for those looking for a home and has grown                     faster than the State as a whole, and Australia as a whole;

-          The State’s economy has had a ridiculous run for 25 years, having not recorded a                       backward movement at all between 1991 and 2015;

-          And that economy is quite diverse by sector, with a surprisingly small proportion made             up by mining.

So, a brief summary of the report would be something like this:

“Look, we know everyone says that Perth’s economy goes up and down like a yo-yo and that if mining does well, Perth does well, but we don’t think that’s fair.  Perth has really grown up and is big enough now so that what happens to the mining guys doesn’t matter to most of us.  Plus, those east coast guys have never taken us seriously, even though we make them look silly by outperforming them.”

The hypothesis is, clearly, that Perth has outgrown the boom and bust tag and that it is an economy that can ride out any economic storms without taking a major hit.

Well, it begs the question, HAS Perth become a resilient economy? 

First things first.  Resilient is defined as “being able to withstand or recover quickly from difficult conditions.”

Withstand or recover from…..

Difficult conditions….

Lets see.

The different factors here seem to be population growth, economic performance, outside factors and the property market, so here goes with a brief look at those 4.

The numbers in the CfP report would lead you to believe WA has been smashing it with population growth forever, right?

Well, has it?

180111 Popn Graph.PNG

Well, the above graph would support the assertion.  For the 29 years from 1984 to 2013 Western Australia’s population has grown at a faster pace than all other States with the exception of Queensland, for pretty much the entire period.

But what about more recently?

181101 Popn Growth Graph.PNG

Since 2012, Greater Perth’s population has stopped growing….dramatically.

OK, interesting…..

I guess we now need to look at how the Australian economy has performed over time, and what factors tend to impact that performance.  Here’s a couple of pretty pictures that illustrate that.

181101 US Aus Japan Graph 1.PNG
181101 US Aus Japan Graph 2.PNG

OK, so Australia’s economic fortunes have fairly closely mirrored those of the USA, from as far back as 1970 until 2001.  Steady upward movement without any blips.

But then in 2001 there was a fairly clear split.  So, what happened in 2001, I wonder?

181101 China GDP Graph.PNG

Ah yes, the rise of China….that’s right. Look at the gradient of that curve from about 2000 onwards….mental.

In a ridiculous stroke of good luck, as the US economy slowed following the Dotcom crash, China decided to industrialise and urbanise on a scale never seen before.  In fact, on a scale unlikely to ever be seen again either.

No other nation on Earth can boast a population of 1.6 Billion, nor can they say they have a centralised government with enough authority to force their population to urbanise.

And Western Australia was at the epicentre of the China-led feeding frenzy. 

181101 WA State Income Per Capita.PNG

But that little bit at the end of the orange curve above is telling, isn’t it?  2011 was when demand for iron ore reached it’s peak, with the red dirt hitting its highest price of approximately $192 USD per tonne, and its kind of been downhill from there for WA.

By 2015 mining construction projects were completed, oil and gas construction projects were completed, State Government funded infrastructure projects were completed, and what was left?  A vacuum.

Western Australian population growth slowed and stalled, unemployment increased (although not by as much as thought as a lot of mining workers left WA and returned to their home states), income levels dropped, spending dropped, mortgage stress appeared, debts went bad and things got a bit ugly.

It’s not just me saying this.  Check out the following graph:

181101 WA SFD Graph.PNG

OK, first.  What is State Final Demand?  It is everything bought and sold within a State, minus the import/export sector.  It is basically the domestic economy.

And WA’s domestic economy has been doing poorly for a while now.  In fact, if the Commonwealth Bank is to be believed, Western Australia’s economy is the worst performing of all the States and Territories, as outlined in its State of the States Report (link included below).

CBA State of the States Report

Now, for those of you who are loyal readers of this humble blog, you will recall WA was also in last place in last year’s State of the States report, so that’s two years in a row we have limped in, in last place.

More and more interesting….

The final piece of information that might sway things one way or the other in the debate regarding the resilience of WA’s economy is the performance of our residential property market.

I mention this last as the property market is typically the last place to feel the effects of changes in the economy. 

Property is a funny one.  I mean, considering it is the single biggest purchase most people will ever make you would think there might be a bit more rational thought applied, but….

Here are some facts re the property market:

-          Owners will default on all their other bills before they let the home loan slip away; and

-          They also are relentlessly positive and consistently fall prey to the “sunk cost” fallacy                 where they believe that if they hold onto the property for just a little longer the market             will bounce back.

In addition;

-          Property is illiquid (it is hard to buy and sell and takes time to do so);

-          Has high transaction costs (stamp duty, settlement fees and real estate agents fees);                 and

-         Takes years to make a capital gain, if any is made, with that gain relying for the most                   part on good luck and waiting ages.

In the absence of any better indicator I will use the median house price to illustrate how Perth has fared over the past 15 years.

180111 Median Prop Prices Table.PNG

In summary, Perth has done OK, but lags behind all the other cities.  A 169% uplift in median price in 15 yrs is a result that’s in line with the standard urban myth/belief that property doubles in value every 10 years.

A closer look shows that almost all of the gain in value occurred between 2002 and 2007, with negligible movement for the next 10 years, and Brisbane shows a similar trend.

Not surprising given they are capital cities in mining states….

Sydney and Melbourne have grown more steadily, however the bulk of the uplift has occurred over the 5 years from 2012 to 2017.

Very, very interesting…..

After all that, what have we got?  Well, Perth has experienced the following over the past 25 years:

-          Consistent population growth from 1991 to 2004, then wildly inconsistent growth from               2004 to 2015;

-          Steady economic growth from 1991 to 2000 on the back of a growing national                           economy tied to the US economy,

-          Rapid economic growth from 2001 to 2015 on the back of a growing Chinese economy               and the global demand for resources and oil and gas;

-          Shrinking domestic economy since 2015;

-          Sharp and inconsistent rises in residential property values.

Back to our question.  Is Perth’s economy resilient?  Can it recover quickly from or withstand difficult conditions?

I would suggest….not.

I would suggest, first and foremost, that Western Australia and Perth have not even experienced difficult conditions in the period 1991 to 2015.  Its just been all sunshine and lollypops.

This assertion about resilience actually reminds me a little of the talk of a “new normal” you hear every time a market or economy shoots the lights out for a while.

A bunch of people with vested interests in that new normal trying to convince you why this is the new normal.

Secondly, once we DID experience difficult conditions (2015 onwards) what happened?

Population growth? Flat.

Unemployment? Up.

State Final Demand?  Down.

Property values?  Declining.

So, no, our economy is not resilient.  It is a tiny cork bobbing around in the Chinese economic ocean.  And for the most part, that’s been a good thing, until it’s not.

Now, the fear underlying this report is what?  I think it’s the fear of the following question: 

“What would happen if the mining sector disappeared?  Would we be OK?”

How would you find the answer to that question?

Funny thing is, we have an example of what happens to a metropolis when it’s one big industry goes into terminal decline:  Detroit, Michigan.

Detroit, also referred to as Motor City, was the home to Ford Motor Co, General Motors and Chrysler Corp and at one point was the 5th most populated city in the USA, but is now the 23rd most populated.

Here’s a great image of the rise and fall of Detroit.

181101 Detroit Popn Graph.PNG

And here is another that illustrates the fall of the major auto manufacturers:

181101 US Auto Makers Graph.PNG

Detroit’s fate was closely tied to that of the auto industry and the city is now having to adjust to life without that industry in its earlier form.  This means a smaller population, a smaller economy, lower GDP per capita.

But the city continues to exist and is actually recovering.  Why?  And how?

Because people have chosen to live there and have enough sunk costs that they are not prepared to leave.

And that’s in a city that is notorious for its inhospitable weather and its inland location.

Another factor to consider in Perth’s case are those mentioned in an earlier Update:  that population growth is closely tied to a location’s climate and location.

People, on average, are more attracted to cities and regions with a temperate climate and coastal location…like Perth’s.

I guess, in summary, what I would say to The Philosopher or anyone else asking about the Perth economy, it’s condition, and the condition of the wider State economy is, we have been lucky.  For a long time we have been lucky.

We live in a beautiful, slow, attractive, stable place that others around the world find appealing.  It appears people will always regard Perth as a potential place to live because of the location, climate and lifestyle…and that’s without the resource sector.

And on top of that, the natural resources of Western Australia also provide the means for all Western Australians to live in comfort and wealth beyond the dreams of billions of others around the world.

Life here is good.

A little bump in Economy Street every once in a while isn’t a bad price to pay for that.